In 1856, when Chinese soldiers boarded a British ship looking for pirates, the Europeans saw their chance. The British and French laid siege to the northern port city of Tianjin in retaliation and soon forced the city to open to trade. By 1900, the Japanese, Germans, and Italians had arrived, each doing business in their own city concession.

After the 1949 revolution, the foreigners were sent packing, and the communists got busy developing Tianjin into one of China's largest industrial bases. Today, Tianjin is undergoing yet another big change. China's push to reform its economy has led to massive layoffs in Tianjin but also has brought in more than $20 billion in foreign capital. Investors are drawn by the city's location, a fast-growing economic-development zone, and by the most basic lure of all: "Labor and land are still inexpensive here," explains Taytian Yu, who runs a factory for U.S. glass and coatings maker PPG Industries.

The capital inflow has given Tianjin a split personality: Ailing domestic smokestack industries coexist with gleaming new foreign facilities. The state-owned Flying Pigeon bicycle factory is one of the losers. Once the proud supplier of bikes to most of China's pedaling commuters, it has had to lay off one-third of its 20,000 employees and has slashed its production as more entrepreneurial bicycle producers have sprung up across China. Former workers try to make a buck fixing used bicycles, shoes, and watches by the roadside.

But just across the city, Otis Elevator Co. is constructing a $3 million center that will train 2,000 people a year in installation and maintenance of elevators and escalators. Already the No.1 supplier in China, Otis has three factories and 1,800 employees in Tianjin.

Procter & Gamble Co.'s Tianjin factory employs 650, and P&G has started a major expansion. "With the port, good railways, and airport, we're able to ship out our product in a timely fashion," says Yvonne Pei, of P&G-China's Hong Kong office. The new plant, being built in the Xiqing district, will become the company's largest production base in China, supplying Pantene, Head & Shoulders, and Rejoice shampoos.

THE FLOOD. Meanwhile, next to Tianjin's huge Xingang Port, the Tianjin Economic-Technological Development Area, founded in 1984, is putting up rows of European-style villas among its humming factories. Blessed with preferential tax policies from Beijing, the zone already boasts $7.5 billion in investment pumped in by more than 2,700 enterprises, including U.S. companies Motorola, GE, Coca-Cola, Pepsi, and Honeywell and others, such as Samsung, Yamaha, Novo Nordisk, and Nestle.

Why the flood of investment in Tianjin? "It's near the central government in Beijing," and that's useful in negotiating deals and following policy changes, explains Pi Qiansheng, the zone's chief. "And it's the cradle of industrial China." Two other little items help, too: The zone doesn't require enterprises to export any portion of their products, a common demand on foreign companies in China, and it doesn't interfere in salary policies.

Tianjin is finding that success has its own price. Confident of its ability to attract foreign investment, China decided last year to cancel a tariff exemption on imported capital goods given to investors. The move will dramatically raise costs. Ironically, China made this decision in part to speed entry into the World Trade Organization: Foreign negotiators have been pushing Beijing to level the playing field between foreign and local companies.

While Tianjin, and indeed most of China, lost the right to grant tariff exemptions, a few places such as Shanghai's Pudong zone, Shenzhen, and Suzhou's development districts have been given five years before they will lose importing privileges. "A large American company asked for exemption on imports. We couldn't give it, so they told us they had to go elsewhere," Pi says.

Although annual investment from 1993 through 1996 averaged $1.5 billion, Pi expects to draw just $1 billion this year. "Only after five years will the playing ground really be level," he laments. And given how fast things change in China, who knows what the rules of the game will be then?EDITED BY HARRY MAURER By Dexter Roberts in TianjinReturn to top